Louisiana State LouisianaVoidableTransactionUVTAFraudulentTransferUFTA
LOUISIANA REVOCATORY ACTION & OBLIQUE ACTION
a/k/a Louisiana Fraudulent Transfer or Conveyance
Louisiana Revocatory Action and Oblique Action
(Non-Uniform Act / Civil Law Equivalent)
LSA-C.C. Art. 2036 et seq.
{ Check Currency - Current Only As Of January 1, 2020 }
Art. 2036. Act of the obligor that causes or increases his insolvency
An obligee has a right to annul an act of the obligor, or the result of a failure to act of the obligor, made or effected after the right of the obligee arose, that causes or increases the obligor’s insolvency.
(a) This Article is new. It changes the law insofar as it abandons the notion of fraud contained in the source articles. Otherwise, it reproduces the substance of C.C. Arts. 1969, 1970, 1971, 1972, 1975, 1977, 1985, 1986, 1988, and 1994 (1870).
(b) This Article substitutes an act of the obligor that causes or increases his insolvency for the notion of an act in fraud of creditors contained in the source articles. As used in those articles, the word “fraud” has a meaning which is difficult to determine but which appears different from its meaning in other contexts. In this revision, the criterion for the revocatory action is an objective one. It may be satisfied by an act done negligently as well as intentionally.
(c) The revocatory or Paulian action, an institution derived from Roman law, is the civil law analogue to the common law suit to set aside a fraudulent conveyance.
(d) The term “act” in this Article encompasses contracts, acts of payment, and any “contrivance” employed by an obligor to defeat his obligee’s rightful claim. See Newman v. Baer, 50 La.Ann. 323, 23 So. 279 (1897). According to the jurisprudence, any arrangement, whether made through judicial machinery or otherwise, whereby an obligor tries to give an obligee an advantage over others may be attacked by the injured obligees. See, e.g., Muse v. Yarborough, 11 La. 521 (1838), (obligor confessed judgment to one obligee in prejudice of the rights of others); Bank of Patterson v. Urban Co., 114 La. 788, 38 So. 561 (1905), (obligor filed answer and consented to quick trial of suit).
(e) The expression, “... the result of a failure to act of the obligor” contemplates situations in which an obligor becomes insolvent, or his insolvency increases, because of his failure to act, as when the obligor fails to defend himself in a law suit, and the resulting judgment creates or increases his insolvency.
(f) Under this Article, anteriority of the debt and insolvency of the debtor are prerequisites to the revocatory action, in accordance with traditional doctrine received by the Louisiana jurisprudence. See Tate, “The Revocatory Action in Louisiana Law,” Essays on the Civil Law of Obligations 133 (Dainow ed. 1969); Landry, “The Revocatory Action in the Quebec Civil Code: General Principles,” Id. at 115. An obligee’s claim does not have to be liquidated to judgment to be considered an anterior debt. Holland v. Gross, 195 So. 828 (La.App.2nd Cir.1940); Ventrilla v. Tortorice, 160 La. 516, 107 So. 390 (1926).
(g) The articles in this section do not address situations in which an already insolvent obligor gives an unfair advantage to one of his creditors. Situations of that kind are regulated by federal bankruptcy law. See 11 U.S.C. § 547.
(h) An obligor’s payment of a just and due debt may not be annulled under this Article. Although it reduces his assets, it also reduces his liabilities by the same amount. If the obligor gives a thing in payment of such a debt, C.C. Art. 2658 (1870) controls. See Morgan v. Gates, 396 So.2d 1386 (La.App.2nd Cir.1981).
Art. 2037. Insolvency
An obligor is insolvent when the total of his liabilities exceeds the total of his fairly appraised assets.
This Article reproduces the substance of C.C. Arts. 1971 and 1985 (1870). It does not change the law.
Art. 2038. Onerous contract made by the obligor
An obligee may annul an onerous contract made by the obligor with a person who knew or should have known that the contract would cause or increase the obligor’s insolvency. In that case, the person is entitled to recover what he gave in return only to the extent that it has inured to the benefit of the obligor’s creditors.
An obligee may annul an onerous contract made by the obligor with a person who did not know that the contract would cause or increase the obligor’s insolvency, but in that case that person is entitled to recover as much as he gave to the obligor. That lack of knowledge is presumed when that person has given at least four-fifths of the value of the thing obtained in return from the obligor.
(a) This Article reproduces the substance of C.C. Arts. 1979, 1980, 1981, and 1982 (1870), but it changes the law insofar as it provides that a contract made by an insolvent obligor with a party in good faith may be annulled regardless of the amount given by the latter.
(b) Under this Article, the amount paid by the third person who contracted with the obligor is no longer a criterion for the annulment of the contract. It only determines whether or not that party was in good faith, and thus whether or not he is entitled to any recovery.
(c) The Louisiana jurisprudence has often asserted the relevance of knowledge of the obligor’s insolvency on the part of one contracting with him in determining the recovery to which the latter is entitled. Ventrilla v. Tortorice, 160 La. 516, 107 So. 390 (1926); Chaffe v. Gill, 43 La.Ann. 1054, 10 So. 361 (1891). See also E.J. Hart & Co. v. Mrs. M.J. Bowie et al., 34 La.Ann. 323 (1882); Seixas v. Citizens’ Bank, 38 La.Ann. 424 (1886); First National Bank of Shreveport v. Pierson, 180 La. 48, 156 So. 171 (1934).
Art. 2039. Gratuitous contract made by the obligor
An obligee may attack a gratuitous contract made by the obligor whether or not the other party knew that the contract would cause or increase the obligor’s insolvency.
This Article is new. It changes the law insofar as it allows annulment of any gratuitous contract that causes or increases the insolvency of an obligor, regardless of the proportion of his assets to his liabilities. The formula provided in C.C. Art. 1980 (1870) has been eliminated because it is not functional. Only one Louisiana decision has relied on it. Planters of Pine Bluff, Inc. v. Gallion Gin, Inc., 228 So.2d 152 (La.App.2nd Cir.1969).
Art. 2040. Contract made in course of business
An obligee may not annul a contract made by the obligor in the regular course of his business.
This Article reproduces the substance of C.C. Art. 1986 (1870). It does not change the law.
Art. 2041. Action must be brought within one year
The action of the obligee must be brought within one year from the time he learned or should have learned of the act, or the result of the failure to act, of the obligor that the obligee seeks to annul, but never after three years from the date of that act or result.
The three year period provided in this Article shall not apply in cases of fraud.
(a) This Article is new. As “insolvency” is substituted for “fraud” as the criterion for availability of the revocatory action, the prescriptive period should be one year from the day the obligee learned of the harm. Otherwise, a devious obligor could prejudice his obligee’s claim and conceal his actions for a year, thereby escaping liability altogether. This approach to prescription conforms with that adopted by Louisiana courts in the field of delicts and quasi-delicts. Nevertheless, to protect the security of transactions, the revocatory action may not be brought after three years from the date of the act or the result of the failure to act of the obligor.
(b) The prescriptive period of C.C. Art. 1994 (1870) runs from date of judgment. Since the revised articles on revocatory action have been drafted to cover unliquidated claims, the “date of judgment” is not a relevant starting point for determining when prescription has run.
(c) If the obligees are represented by a trustee in bankruptcy, then the two-year prescriptive period of 11 U.S.C. § 108 prevails.
Art. 2042. Obligee must join obligor and third persons
In an action to annul either his obligor’s act, or the result of his obligor’s failure to act, the obligee must join the obligor and the third persons involved in that act or failure to act.
A third person joined in the action may plead discussion of the obligor’s assets.
This Article is new. It changes the law only insofar as it provides that the obligee must join the obligor and the third persons who concurred with him in the making of the attacked act. Prior jurisprudence merely permitted such joinder. E.J. Hart & Co. v. Mrs. M.J. Bowie et al., 34 La.Ann. 323 (1882); Ventrilla v. Tortorice, 160 La. 516, 107 So. 390 (1926); and Gast v. Gast, 206 La. 285, 19 So.2d 138 (1944).
Art. 2043. Assets transferred must be returned
If an obligee establishes his right to annul his obligor’s act, or the result of his obligor’s failure to act, that act or result shall be annulled only to the extent that it affects the obligee’s right.
(a) This Article reproduces the substance of C.C. Arts. 1977 and 1988 (1870). It does not change the law.
(b) Under this Article, the effect of the revocatory action is that the attacked transaction is annulled only insofar as annulment will benefit the complaining creditor, and the returned property is applied to the payment of that creditor. See Martin Lebreton Ins. Agency v. Phillips, 364 So.2d 1032 (La.1978).
(c) The effect of the revocatory action inures in the first place to the benefit of the creditor who succeeds in that action, even against a creditor of superior rank who did not bring such an action. See Stubbs v. Lee, 105 La. 642, 30 So. 169 (1901).
(d) Under this Article, when attacking creditors bring revocatory actions at about the same time, the effect of the action brought by one of them inures to the benefit of all such creditors. See Walton & Son v. Bemiss, 16 La. 140 (1840).
Art. 2044. Insolvency by failure to exercise right
If an obligor causes or increases his insolvency by failing to exercise a right, the obligee may exercise it himself, unless the right is strictly personal to the obligor.
For that purpose, the obligee must join in the suit his obligor and the third person against whom that right is asserted.
(a) This Article is new. It does not change the law, however. It gives express formulation to a principle that the redactors of 1825 regarded as too obvious to need stating.
(b) Identification of those actions which are “strictly personal” is left to the discretion of the courts, guided by the provisions of the relevant articles of this revision. See revised C.C. Arts. 1765 and 1766 (Rev.1984), supra; Succession of Henican, 248 So.2d 385 (La.App.4th Cir.1971).
(c) The creditor’s right in the oblique action is similar to the right of a third party beneficiary or the innocent victim of an accident to enforce an insurance contract to which he is not a party. The creditor in an oblique action, like the third party beneficiary or the accident victim, exercises a right which the law gives him to benefit from an obligation to which he is not a party. The debtor in the oblique action should thus not be allowed to claim that he did not intend the creditor’s advantage, as such a defense would not be permitted in the case of the third party beneficiary or the accident victim.
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